Chapter 13 Car Loan Cramdown and the 910-Day Rule

You owe far more on the car than it is worth, and the interest rate is eating your budget. Someone told you Chapter 13 can “cram down” a car loan.

It can, if the loan is old enough. Chapter 13 can reduce what you owe on a car loan to the car’s value, but not on a car you bought for personal use within 910 days, about two and a half years, before you file. Even on a newer loan, the interest rate can often be changed.

What is a car loan cramdown?

A cramdown reduces the secured part of a loan to what the property is worth. A secured debt is one backed by property, and in bankruptcy the lender is treated as secured only up to the car’s value.

The rest of the balance becomes unsecured debt, treated like a credit card in your plan. Say you owe twice what the car is worth: the plan pays the car’s value with interest, and the other half goes in with your other unsecured debts, which in many plans get only a fraction.

The lender keeps its lien, its legal claim on the car, until you finish the plan and receive your discharge, the court order that wipes out the remaining debts in your case. Then the lien has to come off.

What is the 910-day rule?

A cramdown is not allowed on a car loan if all three of these are true:

• It is a purchase-money loan. The loan paid for the car itself, as with dealer financing or a bank loan used to buy that car.
• The car is for personal use. You bought it for yourself or your household, not for a business.
• The loan is less than 910 days old. You took on the debt within 910 days before you filed.

If all three apply, the plan has to pay the full loan balance, not just the car’s value. People call these “910 cars.”

Count from the day you took on the loan, usually the purchase date, to the day you file. If the loan is close to the line, a few weeks of waiting can change the result, and that is a timing question I look at before filing.

Does the 910-day rule apply to my car?

Usually the answer is clear from the purchase contract. These situations take a closer look:

• A refinanced loan. If you refinanced with a new lender, the new loan may not be a purchase-money loan at all. It depends on how the refinance was done.
• A car used for business. A vehicle bought mainly for a business may be treated differently, depending on the facts.
• Negative equity. If the balance of an old loan was rolled into the new one, courts have disagreed on how that part is treated.
• A lease. A lease is not a loan, so there is nothing to cram down. You either keep the lease on its terms or give the car back.

A similar rule applies to other property bought on credit. A purchase-money loan on something other than a car, such as furniture, cannot be crammed down if you took it on within one year before filing.

Can I still lower the interest rate on a 910 car?

In most cases, yes. The 910-day rule stops the plan from cutting the balance to the car’s value, but the plan still pays the claim over time with interest, and most courts let the plan set that rate instead of the loan contract.

The rate usually comes from the Supreme Court’s decision in Till v. SCS Credit Corp., which approved starting with the national prime rate and adding an adjustment for risk. For a high-rate subprime loan, meaning one priced for borrowers with damaged credit, that alone can lower the monthly payment.

The loan can be stretched. The plan can spread the balance over the life of the plan, three to five years, in equal monthly payments. If your loan has fewer months left than the plan, spreading it out can lower the payment further.

What happens with an older car loan?

If the loan is more than 910 days old, the plan generally has to pay only the car’s value, with interest. The rest of the balance is treated as unsecured debt.

Value is often the fight. Bankruptcy uses replacement value, meaning what a retail dealer would charge for a car of that kind, considering its age and condition, as of the day you file. That is usually higher than trade-in value.

Mileage, damage and needed repairs all matter. Photos, repair estimates and a mileage reading from the day you file help support the number.

If the lender disagrees, it can object to the plan, and the judge decides the value.

What if I’m behind on the car payments?

Chapter 13 stops a repossession the moment you file, through the automatic stay, the court order that halts most collection. In most plans the car loan is paid through the plan, and the missed payments are folded into what the plan pays.

While the plan runs, the lender has to be protected. That usually means keeping the car insured and making the payments the plan requires.

If the car has already been taken, call me the same day. Whether you can get it back depends on how far the lender has gotten and how fast you act, and stopping a repossession is easier than undoing one.

What if the case is dismissed?

The cramdown only sticks if you finish the plan. If the case is dismissed or you stop paying, the lender keeps its lien to the extent the law outside bankruptcy recognizes it, which generally means the original loan.

So a plan built around a cramdown has to be one you can actually finish. A lower car payment does not help if the overall plan payment is out of reach.

Can I cram down a car loan in Chapter 7?

No. Chapter 7 has no repayment plan. Your choices with a financed car are to keep paying, often under a reaffirmation agreement, a new promise to pay the loan despite the bankruptcy, to give the car back, or to redeem it.

Redeeming means paying the lender the car’s value in one lump sum to keep it. Few people have that cash on hand.

Is a cramdown worth filing Chapter 13 for?

Rarely on its own. A cramdown is usually one benefit in a Chapter 13 that also handles a mortgage, back taxes or other debt.

It depends on how far underwater you are, the interest rate, how old the loan is and whether you need Chapter 13 for other reasons. If you are in a case and need a different car instead, here is how buying a car during Chapter 13 works.

What should I do right now?

If you are underwater on a car loan, behind on payments or worried about repossession, call me at (202) 448-5136. Bring your purchase contract, your latest loan statement and the current mileage.

If you already have a Chapter 13 case open, call the lawyer handling it first.

The consultation is free. I will tell you whether your loan falls inside the 910 days, what a Chapter 13 plan would pay on it, and whether filing makes sense. I handle bankruptcy in DC, in Maryland at the Greenbelt courthouse, and in the Eastern District of Virginia.

Don’t wait. If the repo truck is coming, every day counts.